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2 years ago · by · 0 comments

Importance of a Life Policy

As a financial consultant, I am a firm believer of a life plan. To me, it is absolutely logical to get a life policy and it will benefit everyone from all walks of life.  Yet, most people are familiar with Medical plans but Life policies remain to be a foreign concept.

In the following videos, I will attempt to illustrate why a life policy is essential, as well as how it works.

Put simply, a medical plan covers bills associated with hospitalizations stay, surgery and medicine costs, chemotherapy etc. Also known as an integrated shield plan, it is possible to be insured using both cash as well as our CPF medisave fund.

A life policy guarantees a sum assured being paid to a policy owner upon the occurrence of the following: Death, Disability, Critical illness and Terminal illness. There are typically more than 70 conditions being covered under this policy, depending on the plan provided by the insurance company.

Here is an example:

Name: John
Age: 21 year old
Smoking status: non smoker
Profile: Newly wed with a new born baby
Occupation: marketing executive

Recommended plans:
Grade A medical plan that offers him both private and restructured hospital coverage (both CPF and cash rider)
Whole life policy insuring him with a sum assured of 150k till age 99, (ten years premium payment term)

SCENARIO 1 

John, 21 year old, signs up for a Grade A Medical plan using his CPF fund, which covers him for hospitalization and surgical expenses on an as charged basis. He adds on a cash rider onto his plan to waive off the deductibles and co-insurance portion to ensure a 100% medical coverage.
On top of that, john decides to get a life policy with a 10 year financing term that insures him with a coverage of 150 thousand SGD. Assuming the life policy costs him 250/month, he would have forked out a total of thirty thousand dollars over a ten year period for his life policy. In total, his cash outlay is 30 thousand over a period of ten years, but he enjoys the protection of 150k SGD if Death, Disability, Critical Illness or Terminal Illness were to occur.

At age 35, John unfortunately contracts stage 2 Brain Cancer. He is referred to a specialist in a private hospital and subsequently administered for surgery. Thanks to the medical plan he has, the expenses associated with the hospitalization surgery will be fully reimbursed by the insurance company. On top of that, he makes a claim of 150 thousand SGD out of his Life Policy upon the diagnosis of his condition. John managed to pay off his mortgage loan using part of the money he received, and decides take a two years sabbatical to focus on recovering from his illness. He is able to sustain a standard of living for both him and his family, without having to worry about his finances. Afterwhich, his life policy is no longer valid as he made a full claim on his condition.

SCENARIO 2

John, 21 year old, signs up for a Grade A Medical plan using his CPF fund, which covers him for hospitalization and surgical expenses on an as charged basis. He adds on a cash rider onto his plan to waive off the deductibles and co-insurance portion to ensure a 100% medical coverage.
On top of that, john decides to get a life policy with a 10 year financing term that insures him with a coverage of 150 thousand SGD. Assuming the life policy costs him 250/month, he would have forked out a total of thirty thousand dollars over a ten year period for his life policy. In total, his cash outlay is 30 thousand over a period of ten years, but he enjoys the protection of 150k SGD if Death, Disability, Critical Illness or Terminal Illness were to occur.

John lives a healthy life up to the age of 65 and is now ready to retire. Over the years, he was administered into the hospital for a minor surgery (appendicitis) and the medical fee was fully covered by the insurance company. At age 65, John has fully paid off his mortgage loan and his children are fully grown up. He feels that he no longer needs the coverage from the Life Policy, as he has no more liabilities. At this point, he has the option to surrender his life plan, and receive the cash value and bonuses that have been vested into his policy. He decides to surrender his plan at the age of 65, and receives 62 thousand SGD in cash to form part of his retirement fund. 

Important points:

  • Factors such as age, gender, occupation class, smoking status etc, determine the pricing of a life policy.
  • It is useful to note that the premiums for a life policy is level, meaning it will not increase over the years. Hence, it makes sense to get a life policy while an individual is perfectly healthy.
  • The younger a person is, the cheaper the premiums will be and the longer they will enjoy the protection from the plan.
  • It is still possible to get a life policy if you have pre-existing conditions. Depending on the severity of the condition, the insurance company might either exclude the condition in the life policy, or impose a higher premium (loading) on the individual.
  • Certain individuals are able to enjoy tax relief out of the premiums they pay for their life plans.
  • Benefits deriving from a life policy are tax-exempted
  • A whole life policy is not to be confused with a term life policy

Hope the above example was useful. To me, investing in a life policy is evidently a win-win situation. In the worst case scenario, the life assured will receive a lump sum of money during his/her most vulnerable moment. In the best case scenario whereby the life assured does not make a claim, he/she will be able to surrender the plan somewhere down the road and receive a lump sum of money to form part of their retirement fund. Should you require further clarification, do not hesitate to leave a note or contact me.

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